ALLOWANCES AND FRINGE BENEFITS: PART II

A4_bIn the previous newsletter we discussed the difference between a travel allowance and the right of use of a motor vehicle and attempted to illustrate the pros and cons of each.  We then found that each case should be evaluated separately since there are various factors that need to be considered to obtain the best possible tax benefit. In this newsletter we will look at subsistence and other allowances that an employee may receive and also consider the tax benefits and drawbacks applicable to each.

Subsistence allowance

A subsistence allowance is normally paid to an employee when the employee undertakes a business trip and has to incur certain expenses, e.g. for accommodation, transport, meals or other incidentals, and the employer wishes to reimburse the employee.

The question arises whether the employee is taxed on the amounts paid/reimbursed to him/her, even if the expenses were incurred solely in the execution of the employee’s duties.

The short answer, in most cases, is yes. However, the South African Revenue Service (SARS) permits certain deductions and exemptions, which provide relief to the employee.  Therefore it is important that every employee is aware of the deductions and exemptions available to him/her.

Section 8(1)(a)(i) of the Income Tax Act No 58, 1962 determines that all allowances or advances must be included in the taxable income of the receiver, excluding amounts actually spent on accommodation and/or meals and other incidentals when, in the course of executing his/her duties,  the employee is obliged to spend at least one night away from his/her normal place of residence.

Accommodation

Section 8(1)(a)(i) of the Act touches on two scenarios.

Firstly, in a case where the employer provides an allowance per night to the employee, the allowance is taxed on the amount actually paid/granted to the employee minus the actual expense incurred by him/her. For example, if Julius receives an allowance of R4 500 for three nights’ accommodation and spends only R3 000 on the accommodation, only R1 500 (R4 500 – R3 000) is included in his taxable income.

Secondly, it sometimes occurs that an employer pays an advance to an employee and requests the employee to hand in, on return from the trip, proof of expenditure together with the remainder of the advance. The taxable portion of the advance is then the amount of the advance minus the amount actually spent on accommodation minus the amount returned to the employer.

In both instances it is important to provide proof of the expenses incurred. It is also important to note that the allowance should not create losses. Should the costs incurred exceed the allowance, no deduction will be allowed for the amount by which the allowance is exceeded.

Meals and other incidental expenditure

Where the employer pays the employee an allowance or advance in respect of meals and other incidental expenses, the allowance or advance is also included in the employee’s income but the employee is entitled to claim one of the following deductions:

The amount actually spent on meals and/or other incidentals; or the amount determined by the Commissioner of SARS for each day or part of a day the employee spends away from his/her normal place of residence.[1] (Note that the employee should spend at least one night away from home in order to qualify.)

The employee may choose the most beneficial option, provided the expenses do not exceed the allowance/advance.

In practice SARS permits the subsistence allowance to be included as a non-taxable allowance on the employee’s IRP5. Thus the deduction is allowed in most instances. It should be noted, however, that especially when an allowance is paid for accommodation, the provisions of Section 8(1)(a)(i) as set out above must be complied with.

Other allowances

Where a salaried person receives another allowance (e.g. an entertainment or cell phone allowance) the allowance is included in his/her taxable income and the expenses incurred (even the expenses incurred for business purposes) may not be deducted for tax purposes.

This, of course, creates a problem for some salaried persons who, by nature of their daily duties, have to incur business expenses that are not deductible against the relevant allowance received.

However, a “deduction” for these expenses may well be accomplished since, although SARS does not permit expenses incurred as other allowances to be deducted, the refunding of business expenses incurred by an employee is not included in the definition of other allowances.

Certain conditions apply, though. The expenses must be incurred on instruction of the employer for the purposes of the employer’s business, and proof of such expenditure must be submitted to the employer.

This means that an employee who is required by his/her employer to entertain clients from time to time, can incur this expense and claim it from the employer without any amount being included in the employee’s taxable income.

It is clear, therefore, that there are cases where the expenses incurred by an employee for business purposes, are indeed tax deductible, although it would be taxable if it were in the form of an allowance. Employers should therefore take into account the tax implications before deciding to include the provision of allowances in employee contracts.

[1] For the 2013 tax year the deduction for meals and incidental expenses for travel in the RSA amounted to R303 per day, and for incidental expenses only, R93 per day. Daily expenses for foreign travel are determined per country and are published by SARS in the Government Gazette.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

IMPLICATIONS OF ESTATE DUTY

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Estate duty is charged on the dutiable value of the estate in terms of the Estate Duty Act. The general rule is that if the taxpayer is ordinarily resident in South Africa at the time of death, all of his/her assets (including deemed property), wherever they are situated, will be included in the gross value of his/her estate for the determination of duty payable thereon.

The current estate duty rate is 20% of the dutiable value of the estate. Foreigners/non-residents also pay estate duty on their South African property.

To minimise the effects of estate duty you need to understand the calculation thereof. The following provisions apply in determining your liability:

1. Which property is to be included.

2. Which property constitutes “deemed property”.

3. Allowable deductions: the possible deductions that are allowed when calculating estate duty.

Property includes all property, or any right to property, including immovable or movable, corporeal or incorporeal – registered in the deceased’s name at the time of his/her death. It also includes certain types of annuities, and options to purchase land or shares, goodwill, and intellectual property.

Deemed property

A. Insurance policies

1. Includes proceeds of domestic insurance policies (payable in South Africa in South African currency [ZAR]), taken out on the life of the deceased, irrespective of who the owner (beneficiary) is.

2. The proceeds of such a policy are subject to estate duty, however this can be reduced by the amount of the premiums, plus interest at 6% per annum, to the extent that the premiums were paid by a third person (the beneficiary) entitled to the proceeds of the policy. Premiums paid by the deceased himself/herself are not deductible from the proceeds for estate duty purposes.

3. If the proceeds of a policy are payable to the surviving spouse or a child of the deceased in terms of a properly registered antenuptial contract (i.e. registered with the Deeds Office) the policy will be totally exempt from estate duty.

4. Where a policy is taken out on each other’s lives by business partners, and certain criteria are met, the proceeds are exempt from estate duty.

B. Benefits payable by pension and other funds by or as a result of the death of the deceased

Payments by such funds (pension, retirement annuity, provident funds) usually consist of two components – a lump sum payment on death and an annuity afterwards. The lump sum component used to be subject to estate duty. However as from 1 January 2009, no amount received from such a fund is included in the estate of the deceased for estate duty purposes.

C. Donations at date of death

Donations where the donee will not benefit until the death of the donor and where the donation only materialises if the donor dies, are not subject to donations tax. These have to be included as an asset in the deceased estate and are subject to estate duty.

D. Claims in terms of the Matrimonial Property Act (accrual claim)

An accrual claim that the estate of a deceased has against the surviving spouse is property deemed to be property in the deceased estate

E. Property that the deceased was competent to dispose of immediately prior to his/her death (Section 3(3)(d) of the Estate Duty Act), like donating an asset to a trust, may be included as deemed property.

Deductions

Some of the most important allowable deductions are:

1.  The cost of funeral, tombstone and deathbed expenses.

2.  Debts due at date of death to persons who have their ordinary residence in South   Africa.

3.  The extent to which these debts are to be settled from property included in the estate. This includes the deceased’s income tax liability (which includes capital gains tax) for the period up to the date of death.

4.  Foreign assets and rights:

a. The general rule is that foreign assets and rights of a South African resident, wherever situated, are included in his/her estate as assets.

b. However, the value thereof can be deducted for estate duty purposes where such foreign property was acquired before the deceased became ordinarily resident in South Africa for the first time, or was acquired by way of donation or inheritance from a non-resident, after the donee became ordinarily resident in South Africa for the first time (provided that the donor or testator was not ordinarily resident in South Africa at the time of the donation or death). The amount of any profits or proceeds of any such property is also deductible.

5. Debts and liabilities due to non-residents:

a. Debts and liabilities due to non-residents are deductible but only to the extent that such debts exceed the value of the deceased’s assets situated outside South Africa which have not been included in the dutiable estate.

6. Bequests to certain public benefit organisations:

a. Where property is bequeathed to a public benefit organisation or public welfare organisation which is exempt from income tax, or to the State or any local authority within South Africa, the value of such property will be able to be deducted for estate duty purposes.

7. Property accruing to a surviving spouse [Section 4(q)]:

a. This includes that much of the value of any property included in the estate that has not already been allowed as a deduction and accrues to a surviving spouse.

b. Note that proceeds of a policy payable to the surviving spouse are required to be included in the estate for estate duty purposes (as deemed property), but that this is deductible in terms of Section 4(q).

c. Section 4(q) deductions will not be granted where the property inherited is subject to a bequest price.

d. Section 4(q) deductions will not be granted where the bequest is to a trust established by the deceased for the benefit of the surviving spouse, if the trustee(s) has/have discretion to allocate such property or any income out of it to any person other than the surviving spouse (a discretionary trust). Where the trustee(s) has/have no discretion as regards both the income and capital of the trust, the Section 4(q) deduction may be granted (a vested trust)

Portable R3.5 million deduction between spouses

The Act allows for the R3.5 million deduction from estate duty to roll over from the deceased to a surviving spouse so that the surviving spouse can use a R7 million deduction amount on his/her death. The portability of the deduction will only apply when the entire value of the estate of the first dying spouse is left to the surviving spouse.

Life assurance for estate duty

Estate duty will also normally be leviable on these assurance proceeds.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

TO REGISTER OR NOT – THE RISK OF PLAYING BANKER

A2_bPurchasers have increasing difficulty to obtain financing for the purchase of farms and other agricultural land. Many sellers of these properties consider granting the purchaser a bond for the purchase amount, to be paid off over a period of time. Worse, some accept an acknowledgement of indebtedness and consent to judgment as sufficient protection, prior to shaking hands and signing off on the transfer agreements

Previously, the mere registration of the bond or the notice confirming the instalment sale of a property registered at the Deeds Office was sufficient. Together with the required written agreement it constituted protection to the incidental money lender in the event of a defaulting purchaser.

The National Credit Act has changed everything. The Act provides, inter alia, that in any credit agreement where the credit amount exceeds R500 000 (five hundred thousand Rand), the lender is to be registered as a credit provider. This includes the occasional private farm seller, even if it is a once-off arrangement with no intention by the seller to provide credit to any other person ever again. Failure to register as a credit provider prior to a transaction that can be defined as a “credit transaction” is a transgression of the Act.

Should the credit provider not be registered and the purchaser defaults on the payment agreement, section 89(5) of the National Credit Act is unequivocally prescriptive on how the courts are to deal with such circumstances. The credit agreement is void as from the date it was entered into. The credit provider must refund all payments made in terms of the agreement together with stipulated interest. Most importantly, all purported rights of the credit provider to recover any money paid or the goods that were delivered to the consumer, are cancelled, or the property forfeited to the state, unless a court finds that such forfeiture will unjustly enrich the purchaser.

Many sellers, and even attorneys, are either unaware of this provision or blatantly flaunt the requirement as they “trust” the purchaser and “know” that the full repayment will be made, including the interest. The problem only manifests when the worst case scenario does occur and the well-known and trusted purchaser defaults on the payments. Many of the sellers who acted as credit providers relied on such repayments and interest either to fund another farm purchase or worse, their retirement.

The Constitutional Court recently considered the validity of this section of the National Credit Act and specifically of the clause relating to forfeiture of the property to the state in the light of the Bill of Rights, regarding the right not to be arbitrarily deprived of property and the so-called Limitation clause. J van der Westhuizen delivered a majority judgement on 10 December 2012 which declared the arbitrary forfeiture of property to the state prescribed in section 89(5)(c) of the National Credit Act to be inconsistent with section 25(1) of the constitution, and thus invalid.

This judgement should, however, sound an urgent alarm to any and all unregistered credit-providing farm sellers. The intention of the National Credit Act is to discourage the provision of credit outside the framework set by the legislature. The Act thus has to punish those that do not comply with the requirements thereof, and the punishment is severe.

Should the farm seller therefore not have registered as a credit provider, and the purchaser defaults on his payments, such seller is at risk – a very real and serious risk. Unless a court orders that the circumstances will unjustly enrich the purchaser, such seller may not only forfeit all payments and interest, but will have to obtain a court order that the seller is entitled to recover the farm from the defaulting purchaser.

If the credit agreement is unlawful as from inception in terms of the National Credit Act, the agreement cannot be enforced and the defaulting party cannot be compelled to perform. In our law, pursuance of such agreement must then be made in terms of unjustified enrichment, and specifically the conditio ob turpem vel iniustam causam. In short, the requirements are that the ownership must have passed with transfer, transfer must have taken place in terms of an unlawful agreement, and the claimant must tender back everything received.

However, to be successful the claimant must be able to prove that he acted free of turpitude and show that the actions were not dishonourable. The banker-playing credit-providing farm seller might not forfeit the farm as the court’s discretion has been unconstitutionally curtailed in section 89(5)(c), but is still far from the position he could have been in had he simply registered as a credit provider.

Civil obedience regarding the legislation of the country creates a stable, safe, just and equitable society with a strong economy and an affinity with investors. Compliance with the National Credit Act not only ensures confidence in immovable property as an investment, but will protect those who want to play banker.

For further reading see National Credit Regulator vs Fillippus Albertus Opperman and others, case number CCT34/12 [2012] ZACC 29 and case law quoted by both the majority judgement and descending judgment written by J Cameron.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

CAPITAL GAINS TAX AND THE SALE OF A PROPERTY

A1_bCapital Gains Tax was introduced on 1 October 2001. Capital Gains Tax is payable on the profit a seller makes when disposing of his property.

What is meant by Capital Gain?

A person’s capital gain on an asset disposed of is the amount by which the proceeds exceed the base cost of that asset.

What is base cost?

The base cost of an asset is what you paid for it, plus the expenditure. The following can be included in calculating the base cost:

  1. The costs of acquiring the property, including the purchase price, transfer costs, transfer duty and professional fees e.g. attorney’s fees and fees paid to a surveyor and auctioneer.
  2. The cost of improvements, alterations and renovations which can be proved by invoices and/or receipts.
  3. The cost of disposing of the property, e.g. advertising costs, cost of obtaining a valuation for capital gains purposes, and estate agents’ commission.

How was base cost of assets held calculated before 1 October 2001?

If the property was acquired before 1 October 2001 you may use one of the following methods to value the property:

  1. 20% x (proceeds less expenditure incurred on or after 1 October 2001).
  2. The market value of the asset as at 1 October 2001, which valuation must have been obtained before 30 September 2004.
  3. Time-apportionment  base cost method. Original cost + (proceeds – original cost) x number of years held before 1 October 2001 divided by the number of years held before 1 October 2001 + number of years held after 1 October 2001).

 How is Capital Gains Tax paid?

Capital Gains Tax is not a separate tax from income tax. Part of a person’s capital gain is included in his taxable income. It is then subject to normal tax. A portion of the total of the taxpayer’s capital gain less capital losses for the year is included in the taxpayer’s taxable income and taxed in terms of normal tax tables.

How is Capital Gain calculated?

If you are an individual, the first R30 000 of your total capital gain will be disregarded. Then 33.3% of the capital gain made on disposal of the property must be included in the taxable income for the year of assessment in which the property is sold. When the property is owned by a company, a close corporation or an ordinary trust, 66.6% of the capital gain must be included in their taxable income.

Primary residence and Capital Gains Tax

As from 1 March 2012 the first R2 million of any capital gain on the sale of a primary residence is exempted from Capital Gains Tax. This exemption only applies where the property is registered in the name of an individual or in the name of a special trust. The property should furthermore not exceed 2 hectares. If the property is used partially for residential and partially for business purposes, an apportionment must be done.

If more than one person holds an interest in a primary residence, the exclusion will be in proportion to the interest held by each party. For example, if you and your spouse have an equal interest in the primary residence, you will each qualify for a primary residence exclusion of R1 million. You will also be entitled to the annual exclusion, currently R30 000.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.